Does India’s Sovereign Credit Rating Reflect Its Fundamentals? No! | Economic Survey & Government Reports - UPSC PDF Download

 Page 1


CHAPTER
03
 
 “Where the mind is without fear and the head is held high …
Into that heaven of freedom, my Father, let my country awake”.
— Rabindranath Thakur
Never in the history of sovereign credit ratings has the fifth largest economy in the 
world been rated as the lowest rung of the investment grade (BBB-/Baa3). Reflecting 
the economic size and thereby the ability to repay debt, the fifth largest economy has 
been predominantly rated AAA. China and India are the only exceptions to this rule – 
China was rated A-/A2 in 2005 and now India is rated BBB-/Baa3. Do the fundamentals 
that supposedly drive sovereign credit ratings rationalise this historical anomaly? In this 
chapter, the Survey asks this important question and answers a resounding No!
Within its sovereign credit ratings cohort – countries rated between A+/A1 and BBB-/
Baa3 for S&P/ Moody’ s – India is a clear outlier on several parameters, i.e. a sovereign 
whose rating is significantly lower than mandated by the effect on the sovereign rating 
of the parameter. These include GDP growth rate, inflation, general government debt (as 
per cent of GDP), cyclically adjusted primary balance (as per cent of potential GDP), 
current account balance (as per cent of GDP), political stability, rule of law, control of 
corruption, investor protection, ease of doing business, short-term external debt (as per 
cent of reserves), reserve adequacy ratio and sovereign default history. The outlier status 
remains true not only now but also during the last two decades.
Credit ratings map the probability of default and therefore reflect the willingness and 
ability of borrower to meet its obligations. India’ s willingness to pay is unquestionably 
demonstrated through its zero sovereign default history. India’ s ability to pay can be 
gauged not only by the extremely low foreign currency denominated debt of the sovereign 
but also by the comfortable size of its foreign exchange reserves that can pay for the 
short term debt of the private sector as well as the entire stock of India's external debt 
including that of the private sector. India’ s non-government short term-debt as per cent of 
forex reserves stood at 19 per cent as of September 2020. India’ s forex reserves can cover 
an additional 2.8 standard deviation negative event, i.e. an event that can be expected 
to manifest with a probability of less than 0.1 per cent after meeting all short-term debt. 
India’ s forex reserves stood at US$ 584.24 as of January 15, 2021, greater than India’ s 
Does India’s Sovereign Credit Rating 
reflect its fundamentals No!
Page 2


CHAPTER
03
 
 “Where the mind is without fear and the head is held high …
Into that heaven of freedom, my Father, let my country awake”.
— Rabindranath Thakur
Never in the history of sovereign credit ratings has the fifth largest economy in the 
world been rated as the lowest rung of the investment grade (BBB-/Baa3). Reflecting 
the economic size and thereby the ability to repay debt, the fifth largest economy has 
been predominantly rated AAA. China and India are the only exceptions to this rule – 
China was rated A-/A2 in 2005 and now India is rated BBB-/Baa3. Do the fundamentals 
that supposedly drive sovereign credit ratings rationalise this historical anomaly? In this 
chapter, the Survey asks this important question and answers a resounding No!
Within its sovereign credit ratings cohort – countries rated between A+/A1 and BBB-/
Baa3 for S&P/ Moody’ s – India is a clear outlier on several parameters, i.e. a sovereign 
whose rating is significantly lower than mandated by the effect on the sovereign rating 
of the parameter. These include GDP growth rate, inflation, general government debt (as 
per cent of GDP), cyclically adjusted primary balance (as per cent of potential GDP), 
current account balance (as per cent of GDP), political stability, rule of law, control of 
corruption, investor protection, ease of doing business, short-term external debt (as per 
cent of reserves), reserve adequacy ratio and sovereign default history. The outlier status 
remains true not only now but also during the last two decades.
Credit ratings map the probability of default and therefore reflect the willingness and 
ability of borrower to meet its obligations. India’ s willingness to pay is unquestionably 
demonstrated through its zero sovereign default history. India’ s ability to pay can be 
gauged not only by the extremely low foreign currency denominated debt of the sovereign 
but also by the comfortable size of its foreign exchange reserves that can pay for the 
short term debt of the private sector as well as the entire stock of India's external debt 
including that of the private sector. India’ s non-government short term-debt as per cent of 
forex reserves stood at 19 per cent as of September 2020. India’ s forex reserves can cover 
an additional 2.8 standard deviation negative event, i.e. an event that can be expected 
to manifest with a probability of less than 0.1 per cent after meeting all short-term debt. 
India’ s forex reserves stood at US$ 584.24 as of January 15, 2021, greater than India’ s 
Does India’s Sovereign Credit Rating 
reflect its fundamentals No!
85 Does India’s Sovereign Credit Rating reflect its fundamentals No!
THE BIAS AGAINST EMERGING GIANTS IN SOVEREIGN CREDIT 
RATINGS
3.1.	 Never 	 in 	 history 	 has 	 the 	 fifth 	 lar gest 	 economy 	 in 	 the 	 world 	 been 	 rated 	 a 	 BBB-! 	 Since 	 1994,	
the 	 only 	 times 	 that 	 the 	 sovereign 	 credit 	 ratings 	 of 	 the 	 fifth 	 lar gest 	economy 	 in 	 current 	 US$ 	 terms	
has 	 precipitously 	 declined, 	 has 	 been 	 when 	 emer ging 	 giants 	 China 	 and 	 India 	 have 	 come 	 to 	 occupy	
the 	position. 	Figure 	1 	shows 	that 	the 	sovereign 	credit 	rating 	of 	the 	fifth 	lar gest 	economy 	(current	
US$) 	 by 	 two 	 credit 	 ratings 	 agencies 	 (CRAs) 	 declined 	 steeply 	 in 	 2005 	 following 	 China’ s 	 entry 	 into	
the 	 top 	 five 	 economies. 	 Similarly , 	 the 	 sovereign 	 credit 	 rating 	 of 	 the 	 fifth 	 lar gest 	 economy 	 (current	
US$) 	 by 	 two 	 CRAs 	 declined 	 steeply 	 in 	 2019 	 following 	 India’ s 	 entry 	 into 	 the 	 top 	 five 	 economies. 	
Figure 1: Sovereign Credit Rating of Fifth Largest Economy (Current US $)
Sovereign Credit Rating
S&P/Moody's
Source: 	Bloomber g	and 	 W orld	Bank
total external debt (including that of the private sector) of US$ 556.2 bn as of September 
2020. In corporate finance parlance, therefore, India resembles a firm that has negative 
debt, whose probability of default is zero by definition. Despite this compelling statistic, 
India is an inexplicable outlier in its ratings cohort. The Survey’ s findings are consistent 
with a large academic literature that highlights bias and subjectivity in sovereign credit 
ratings, especially against countries with lower ratings.
As ratings do not capture India’ s fundamentals, it comes as no surprise that past episodes 
of sovereign credit rating changes for India have not had major adverse impact on select 
indicators such as Sensex return, foreign exchange rate and yield on government securities. 
Past episodes of rating changes have no or weak correlation with macroeconomic indicators. 
India’ s fiscal policy, therefore, must not remain beholden to a noisy/biased measure of 
India’ s fundamentals and should instead reflect Gurudev Rabindranath Thakur’ s sentiment 
of a mind without fear. Despite ratings not reflecting fundamentals, noisy, opaque and 
biased credit ratings damage FPI flows. It is therefore imperative that countries engage 
with CRAs to make the case that their methodology must be corrected to reflect economies’ 
ability and willingness to pay their external obligations. Moreover, the pro-cyclical 
nature of credit ratings and its potential adverse impact on economies, especially low-
rated developing economies must be expeditiously addressed. India has already raised 
the issue of pro-cyclicality of credit ratings in G20. In response, the Financial Stability 
Board (FSB) is now focusing on assessing the pro-cyclicality of credit rating downgrades.
Page 3


CHAPTER
03
 
 “Where the mind is without fear and the head is held high …
Into that heaven of freedom, my Father, let my country awake”.
— Rabindranath Thakur
Never in the history of sovereign credit ratings has the fifth largest economy in the 
world been rated as the lowest rung of the investment grade (BBB-/Baa3). Reflecting 
the economic size and thereby the ability to repay debt, the fifth largest economy has 
been predominantly rated AAA. China and India are the only exceptions to this rule – 
China was rated A-/A2 in 2005 and now India is rated BBB-/Baa3. Do the fundamentals 
that supposedly drive sovereign credit ratings rationalise this historical anomaly? In this 
chapter, the Survey asks this important question and answers a resounding No!
Within its sovereign credit ratings cohort – countries rated between A+/A1 and BBB-/
Baa3 for S&P/ Moody’ s – India is a clear outlier on several parameters, i.e. a sovereign 
whose rating is significantly lower than mandated by the effect on the sovereign rating 
of the parameter. These include GDP growth rate, inflation, general government debt (as 
per cent of GDP), cyclically adjusted primary balance (as per cent of potential GDP), 
current account balance (as per cent of GDP), political stability, rule of law, control of 
corruption, investor protection, ease of doing business, short-term external debt (as per 
cent of reserves), reserve adequacy ratio and sovereign default history. The outlier status 
remains true not only now but also during the last two decades.
Credit ratings map the probability of default and therefore reflect the willingness and 
ability of borrower to meet its obligations. India’ s willingness to pay is unquestionably 
demonstrated through its zero sovereign default history. India’ s ability to pay can be 
gauged not only by the extremely low foreign currency denominated debt of the sovereign 
but also by the comfortable size of its foreign exchange reserves that can pay for the 
short term debt of the private sector as well as the entire stock of India's external debt 
including that of the private sector. India’ s non-government short term-debt as per cent of 
forex reserves stood at 19 per cent as of September 2020. India’ s forex reserves can cover 
an additional 2.8 standard deviation negative event, i.e. an event that can be expected 
to manifest with a probability of less than 0.1 per cent after meeting all short-term debt. 
India’ s forex reserves stood at US$ 584.24 as of January 15, 2021, greater than India’ s 
Does India’s Sovereign Credit Rating 
reflect its fundamentals No!
85 Does India’s Sovereign Credit Rating reflect its fundamentals No!
THE BIAS AGAINST EMERGING GIANTS IN SOVEREIGN CREDIT 
RATINGS
3.1.	 Never 	 in 	 history 	 has 	 the 	 fifth 	 lar gest 	 economy 	 in 	 the 	 world 	 been 	 rated 	 a 	 BBB-! 	 Since 	 1994,	
the 	 only 	 times 	 that 	 the 	 sovereign 	 credit 	 ratings 	 of 	 the 	 fifth 	 lar gest 	economy 	 in 	 current 	 US$ 	 terms	
has 	 precipitously 	 declined, 	 has 	 been 	 when 	 emer ging 	 giants 	 China 	 and 	 India 	 have 	 come 	 to 	 occupy	
the 	position. 	Figure 	1 	shows 	that 	the 	sovereign 	credit 	rating 	of 	the 	fifth 	lar gest 	economy 	(current	
US$) 	 by 	 two 	 credit 	 ratings 	 agencies 	 (CRAs) 	 declined 	 steeply 	 in 	 2005 	 following 	 China’ s 	 entry 	 into	
the 	 top 	 five 	 economies. 	 Similarly , 	 the 	 sovereign 	 credit 	 rating 	 of 	 the 	 fifth 	 lar gest 	 economy 	 (current	
US$) 	 by 	 two 	 CRAs 	 declined 	 steeply 	 in 	 2019 	 following 	 India’ s 	 entry 	 into 	 the 	 top 	 five 	 economies. 	
Figure 1: Sovereign Credit Rating of Fifth Largest Economy (Current US $)
Sovereign Credit Rating
S&P/Moody's
Source: 	Bloomber g	and 	 W orld	Bank
total external debt (including that of the private sector) of US$ 556.2 bn as of September 
2020. In corporate finance parlance, therefore, India resembles a firm that has negative 
debt, whose probability of default is zero by definition. Despite this compelling statistic, 
India is an inexplicable outlier in its ratings cohort. The Survey’ s findings are consistent 
with a large academic literature that highlights bias and subjectivity in sovereign credit 
ratings, especially against countries with lower ratings.
As ratings do not capture India’ s fundamentals, it comes as no surprise that past episodes 
of sovereign credit rating changes for India have not had major adverse impact on select 
indicators such as Sensex return, foreign exchange rate and yield on government securities. 
Past episodes of rating changes have no or weak correlation with macroeconomic indicators. 
India’ s fiscal policy, therefore, must not remain beholden to a noisy/biased measure of 
India’ s fundamentals and should instead reflect Gurudev Rabindranath Thakur’ s sentiment 
of a mind without fear. Despite ratings not reflecting fundamentals, noisy, opaque and 
biased credit ratings damage FPI flows. It is therefore imperative that countries engage 
with CRAs to make the case that their methodology must be corrected to reflect economies’ 
ability and willingness to pay their external obligations. Moreover, the pro-cyclical 
nature of credit ratings and its potential adverse impact on economies, especially low-
rated developing economies must be expeditiously addressed. India has already raised 
the issue of pro-cyclicality of credit ratings in G20. In response, the Financial Stability 
Board (FSB) is now focusing on assessing the pro-cyclicality of credit rating downgrades.
86 Economic Survey 2020-21   V olume 1
3.2.	 A 	 simila r 	 trend	 is 	 seen 	 in 	 PPP 	 current 	 internati onal 	 $	 terms. 	 Since 	 1994,	 the 	 only 	 times 	
that 	 the	 sovereign 	 credit 	 ratings 	 of 	 the 	 third 	 lar gest 	 economy 	 in 	 PPP 	 terms 	 has 	 steeply 	 declined, 	
has	 been 	 when 	 emer ging 	 giants 	 China 	 and 	 India	 have 	 become	 the 	 third 	 lar gest 	 economy . 
Figure 	 2 	 shows	 that	 the 	 sovereign 	 credit 	 rating 	 of 	 the 	 third 	 lar gest 	 economy 	 (PPP) 	 declined 	
sharply 	 in 	 1994	 by	 two	 CRAs,	 following 	 China’ s	 entry	 into 	 the 	 top 	 three 	 economies. 	 Similarly , 	
the	 sovereign 	 credit 	 rating 	 of 	 the 	 third 	 lar gest 	 econom y 	 (PPP) 	 declined 	 sharply 	 in 	 2009	 by	 two	
CRAs,	following 	India’ s 	entry	into 	the 	top 	three 	economies. 	
Figure 2: Sovereign Credit Rating of Third Largest 
Economy (PPP Current International $)
Sovereign Credit Rating
S&P/Moody's
Source: 	Bloomber g	and 	 W orld	Bank
INDIA’S SOVEREIGN CREDIT RATINGS 
3.3 This 	 anomaly 	 in 	 sovereign 	 credit 	 ratings 	 has 	 continued 	 for 	 India. Currently , India 	 is 	 rated	
investment 	 grade 	 by 	 three 	 major 	 CRAs 	 – 	 S&P , 	 Moody’ s 	 and 	 Fitch. 	 India’ s 	 sovereign 	 credit	
ratings 	 during 	 1998-2020 	 are 	 presented 	 in 	 T able 	 1. 	 Rationale 	 given 	 for 	 the 	 same 	 by 	 these	
CRAs 	 is 	 depicted 	 in 	 Figure 	 3. 	 India’ s 	 sovereign 	 credit 	 rating 	 downgrades 	 during 	 1998-2018	
are 	 mainly 	 confined 	 to 	 the 	 1990s 	 on 	 account 	 of 	 the 	 post-Pokhran 	 sanctions 	 in 	 1998. 	 India’ s	
sovereign 	 credit 	 ratings 	 upgrades 	 have 	 mainly 	 been 	 witnessed 	 in 	 the 	 second 	 half 	 of 	 2000s, 	 in	
recognition 	 of 	 higher 	 economic 	 growth 	 prospects 	 and 	 strengthened 	 fundamentals 	 of 	 the 	 Indian	
economy .
3.4	 Further , 	 during 	 most 	 of 	 the 	 1990s 	 and 	 mid 	 2000s, 	 India’ s 	 sovereign 	 credit 	 rating 	 was	
speculative 	 grade. 	 India’ s 	 credit 	 rating 	 was	 upgraded 	 to 	 investment 	 grade 	 by	 Moody’ s 	 in 	 2004, 	
Fitch 	 in	 2006	 and 	 S&P 	 in 	 2007	 (T able	 1). 	 Notably , 	 Indian	 economy 	 grew 	 at 	 an 	 average 	 rate 	
of	 over	 six 	 per 	 cent 	 (Figure 	 4), 	 and 	 at 	 approximatel y 	 eight	 per 	 cent 	 in 	 several 	 years	 during 	
this	 period. 	 Hence, 	 during 	 most	 of 	 the 	 decade 	 of 	 1990	 and 	 early 	 2000’ s, 	 India’ s 	 high 	 rate 	 of 	
economic 	growth 	co-existed 	with 	 a 	sovereign 	credit 	rating 	of 	“speculative 	grade”.
Page 4


CHAPTER
03
 
 “Where the mind is without fear and the head is held high …
Into that heaven of freedom, my Father, let my country awake”.
— Rabindranath Thakur
Never in the history of sovereign credit ratings has the fifth largest economy in the 
world been rated as the lowest rung of the investment grade (BBB-/Baa3). Reflecting 
the economic size and thereby the ability to repay debt, the fifth largest economy has 
been predominantly rated AAA. China and India are the only exceptions to this rule – 
China was rated A-/A2 in 2005 and now India is rated BBB-/Baa3. Do the fundamentals 
that supposedly drive sovereign credit ratings rationalise this historical anomaly? In this 
chapter, the Survey asks this important question and answers a resounding No!
Within its sovereign credit ratings cohort – countries rated between A+/A1 and BBB-/
Baa3 for S&P/ Moody’ s – India is a clear outlier on several parameters, i.e. a sovereign 
whose rating is significantly lower than mandated by the effect on the sovereign rating 
of the parameter. These include GDP growth rate, inflation, general government debt (as 
per cent of GDP), cyclically adjusted primary balance (as per cent of potential GDP), 
current account balance (as per cent of GDP), political stability, rule of law, control of 
corruption, investor protection, ease of doing business, short-term external debt (as per 
cent of reserves), reserve adequacy ratio and sovereign default history. The outlier status 
remains true not only now but also during the last two decades.
Credit ratings map the probability of default and therefore reflect the willingness and 
ability of borrower to meet its obligations. India’ s willingness to pay is unquestionably 
demonstrated through its zero sovereign default history. India’ s ability to pay can be 
gauged not only by the extremely low foreign currency denominated debt of the sovereign 
but also by the comfortable size of its foreign exchange reserves that can pay for the 
short term debt of the private sector as well as the entire stock of India's external debt 
including that of the private sector. India’ s non-government short term-debt as per cent of 
forex reserves stood at 19 per cent as of September 2020. India’ s forex reserves can cover 
an additional 2.8 standard deviation negative event, i.e. an event that can be expected 
to manifest with a probability of less than 0.1 per cent after meeting all short-term debt. 
India’ s forex reserves stood at US$ 584.24 as of January 15, 2021, greater than India’ s 
Does India’s Sovereign Credit Rating 
reflect its fundamentals No!
85 Does India’s Sovereign Credit Rating reflect its fundamentals No!
THE BIAS AGAINST EMERGING GIANTS IN SOVEREIGN CREDIT 
RATINGS
3.1.	 Never 	 in 	 history 	 has 	 the 	 fifth 	 lar gest 	 economy 	 in 	 the 	 world 	 been 	 rated 	 a 	 BBB-! 	 Since 	 1994,	
the 	 only 	 times 	 that 	 the 	 sovereign 	 credit 	 ratings 	 of 	 the 	 fifth 	 lar gest 	economy 	 in 	 current 	 US$ 	 terms	
has 	 precipitously 	 declined, 	 has 	 been 	 when 	 emer ging 	 giants 	 China 	 and 	 India 	 have 	 come 	 to 	 occupy	
the 	position. 	Figure 	1 	shows 	that 	the 	sovereign 	credit 	rating 	of 	the 	fifth 	lar gest 	economy 	(current	
US$) 	 by 	 two 	 credit 	 ratings 	 agencies 	 (CRAs) 	 declined 	 steeply 	 in 	 2005 	 following 	 China’ s 	 entry 	 into	
the 	 top 	 five 	 economies. 	 Similarly , 	 the 	 sovereign 	 credit 	 rating 	 of 	 the 	 fifth 	 lar gest 	 economy 	 (current	
US$) 	 by 	 two 	 CRAs 	 declined 	 steeply 	 in 	 2019 	 following 	 India’ s 	 entry 	 into 	 the 	 top 	 five 	 economies. 	
Figure 1: Sovereign Credit Rating of Fifth Largest Economy (Current US $)
Sovereign Credit Rating
S&P/Moody's
Source: 	Bloomber g	and 	 W orld	Bank
total external debt (including that of the private sector) of US$ 556.2 bn as of September 
2020. In corporate finance parlance, therefore, India resembles a firm that has negative 
debt, whose probability of default is zero by definition. Despite this compelling statistic, 
India is an inexplicable outlier in its ratings cohort. The Survey’ s findings are consistent 
with a large academic literature that highlights bias and subjectivity in sovereign credit 
ratings, especially against countries with lower ratings.
As ratings do not capture India’ s fundamentals, it comes as no surprise that past episodes 
of sovereign credit rating changes for India have not had major adverse impact on select 
indicators such as Sensex return, foreign exchange rate and yield on government securities. 
Past episodes of rating changes have no or weak correlation with macroeconomic indicators. 
India’ s fiscal policy, therefore, must not remain beholden to a noisy/biased measure of 
India’ s fundamentals and should instead reflect Gurudev Rabindranath Thakur’ s sentiment 
of a mind without fear. Despite ratings not reflecting fundamentals, noisy, opaque and 
biased credit ratings damage FPI flows. It is therefore imperative that countries engage 
with CRAs to make the case that their methodology must be corrected to reflect economies’ 
ability and willingness to pay their external obligations. Moreover, the pro-cyclical 
nature of credit ratings and its potential adverse impact on economies, especially low-
rated developing economies must be expeditiously addressed. India has already raised 
the issue of pro-cyclicality of credit ratings in G20. In response, the Financial Stability 
Board (FSB) is now focusing on assessing the pro-cyclicality of credit rating downgrades.
86 Economic Survey 2020-21   V olume 1
3.2.	 A 	 simila r 	 trend	 is 	 seen 	 in 	 PPP 	 current 	 internati onal 	 $	 terms. 	 Since 	 1994,	 the 	 only 	 times 	
that 	 the	 sovereign 	 credit 	 ratings 	 of 	 the 	 third 	 lar gest 	 economy 	 in 	 PPP 	 terms 	 has 	 steeply 	 declined, 	
has	 been 	 when 	 emer ging 	 giants 	 China 	 and 	 India	 have 	 become	 the 	 third 	 lar gest 	 economy . 
Figure 	 2 	 shows	 that	 the 	 sovereign 	 credit 	 rating 	 of 	 the 	 third 	 lar gest 	 economy 	 (PPP) 	 declined 	
sharply 	 in 	 1994	 by	 two	 CRAs,	 following 	 China’ s	 entry	 into 	 the 	 top 	 three 	 economies. 	 Similarly , 	
the	 sovereign 	 credit 	 rating 	 of 	 the 	 third 	 lar gest 	 econom y 	 (PPP) 	 declined 	 sharply 	 in 	 2009	 by	 two	
CRAs,	following 	India’ s 	entry	into 	the 	top 	three 	economies. 	
Figure 2: Sovereign Credit Rating of Third Largest 
Economy (PPP Current International $)
Sovereign Credit Rating
S&P/Moody's
Source: 	Bloomber g	and 	 W orld	Bank
INDIA’S SOVEREIGN CREDIT RATINGS 
3.3 This 	 anomaly 	 in 	 sovereign 	 credit 	 ratings 	 has 	 continued 	 for 	 India. Currently , India 	 is 	 rated	
investment 	 grade 	 by 	 three 	 major 	 CRAs 	 – 	 S&P , 	 Moody’ s 	 and 	 Fitch. 	 India’ s 	 sovereign 	 credit	
ratings 	 during 	 1998-2020 	 are 	 presented 	 in 	 T able 	 1. 	 Rationale 	 given 	 for 	 the 	 same 	 by 	 these	
CRAs 	 is 	 depicted 	 in 	 Figure 	 3. 	 India’ s 	 sovereign 	 credit 	 rating 	 downgrades 	 during 	 1998-2018	
are 	 mainly 	 confined 	 to 	 the 	 1990s 	 on 	 account 	 of 	 the 	 post-Pokhran 	 sanctions 	 in 	 1998. 	 India’ s	
sovereign 	 credit 	 ratings 	 upgrades 	 have 	 mainly 	 been 	 witnessed 	 in 	 the 	 second 	 half 	 of 	 2000s, 	 in	
recognition 	 of 	 higher 	 economic 	 growth 	 prospects 	 and 	 strengthened 	 fundamentals 	 of 	 the 	 Indian	
economy .
3.4	 Further , 	 during 	 most 	 of 	 the 	 1990s 	 and 	 mid 	 2000s, 	 India’ s 	 sovereign 	 credit 	 rating 	 was	
speculative 	 grade. 	 India’ s 	 credit 	 rating 	 was	 upgraded 	 to 	 investment 	 grade 	 by	 Moody’ s 	 in 	 2004, 	
Fitch 	 in	 2006	 and 	 S&P 	 in 	 2007	 (T able	 1). 	 Notably , 	 Indian	 economy 	 grew 	 at 	 an 	 average 	 rate 	
of	 over	 six 	 per 	 cent 	 (Figure 	 4), 	 and 	 at 	 approximatel y 	 eight	 per 	 cent 	 in 	 several 	 years	 during 	
this	 period. 	 Hence, 	 during 	 most	 of 	 the 	 decade 	 of 	 1990	 and 	 early 	 2000’ s, 	 India’ s 	 high 	 rate 	 of 	
economic 	growth 	co-existed 	with 	 a 	sovereign 	credit 	rating 	of 	“speculative 	grade”.
87 Does India’s Sovereign Credit Rating reflect its fundamentals No!
Table 1: India’s Sovereign Credit Rating (1998-2020)
Date S&P Moody’s Fitch
June 	1998 Ba2*
October 	 1998 BB*
March 	2000 BB+*
November 	2001 BB*
February 	2003 Ba1*
January 	 2004 BB+*
January 	 2004 Baa3
February 	2005 BB+* 	
August	2006 BBB-
January 	 2007 BBB- 	
November 	2017 Baa2
June 	2020 Baa3
*Speculative 	 Grade; 	 Green 	 highlights 	 ratings 	 upgrade ; 	 Red 	 highlights 	 ratings 	 downgrade , 	 Black 	 indicates 	 first 	 rating
Source: 	Compiled 	from	S&P 	Global,	Fitch 	and 	Moody’ s
Box 1: What are Sovereign Credit Ratings?
Sovereign 	 credit 	 ratings 	 seek 	 to 	 quantify 	 issuers’ 	 ability 	 to 	 meet 	 debt 	 obligations. 	 When 	 favourable, 	
these	 can 	 facilitate 	 countries 	 access 	 to 	 global	 capital 	 markets 	 and 	 foreign 	 investment. 	 T able 	 below 	
presents 	what 	three 	key 	CRAs 	–	S&P , 	Moody’ s 	and 	Fitch, 	seek 	to 	measure.
What Credit Ratings Measure
Fitch "Credit 	 ratings 	 express 	 risk	 in 	 relative 	 rank 	 order ,	 which 	 is 	 to 	 say 	 they 	 are 	 ordinal 	
measures 	 of 	 credit 	 risk	 and 	 are 	 not 	 predictive 	 of 	 a 	 specific 	 frequency 	 of 	 default 	 or 	 loss. 	
Fitch 	 Ratings' 	 credit 	 ratings 	 do	 not 	 directly 	 address 	 any 	 risk	 other 	 than 	 credit 	 risk,	 ratings 	
do 	 not 	 deal 	 with 	 the 	 risk	 of 	 a 	 market 	 value 	 loss 	 on	 a 	 rate d 	 security 	 due 	 to 	 changes 	 in 	
interest 	rates, 	liquidity	and 	other 	market 	considerations."
Moody's "There 	 is 	 an 	 expectation 	 that	 rating 	 will, 	 on	 average, 	 relate 	 to 	 subsequent 	 default 	 frequency , 	
although	 they 	 typically	 are 	 not 	 defined 	 as 	 precise 	 default 	 rate 	 estimates. 	 Moody's 	 ratings 	
are 	 therefore 	 intended 	 to 	 convey 	 opinions 	 of 	 the 	 relative 	 creditworthiness	 of 	 issues 	 and 	
obligations...Moody's 	 rating 	 process 	 also 	 involves 	 forming 	 views 	 about 	 the 	 likelihood 	 of 	
plausible 	 scenarios, 	 or 	 outcomes—not 	 forecasting 	 them,	 but 	 instead 	 placing 	 some 	 weight 	
on 	 their 	 likely 	 occurrence 	 and 	 on	 the 	 potential	 credit 	 consequences. 	 Normal 	 fluctuations 	
in 	 economic 	 activity	 are 	 generally 	 included 	 in 	 these 	 scenarios, 	 and 	 by	 incorporating 	 our 	
views 	 about 	 the 	 likehood	 of 	 such 	 scenarios, 	 we 	 give 	 our 	 ratings 	 relative 	 stability 	 over 	
economic 	cycles 	and 	a 	sense 	of 	horizon."
Standard 	
&	Poor's
"Standard 	 & 	 Poor's 	 credit 	 ratings 	 are 	 designed 	 primarily 	 to 	 provide 	 relative 	 rankings 	
among 	 issues 	 and 	 obligations 	 of 	 overall 	 creditworthiness; 	 the 	 ratings 	 are 	 not 	 measures 	 of 	
absolute 	 default 	 probability . 	 Creditworthiness 	 encompasses 	 likehood	 of 	 default 	 and 	 also 	
includes 	payment 	priority , 	recovery , 	and 	credit 	stability ."
Source: 	 IMF	(2010)
Page 5


CHAPTER
03
 
 “Where the mind is without fear and the head is held high …
Into that heaven of freedom, my Father, let my country awake”.
— Rabindranath Thakur
Never in the history of sovereign credit ratings has the fifth largest economy in the 
world been rated as the lowest rung of the investment grade (BBB-/Baa3). Reflecting 
the economic size and thereby the ability to repay debt, the fifth largest economy has 
been predominantly rated AAA. China and India are the only exceptions to this rule – 
China was rated A-/A2 in 2005 and now India is rated BBB-/Baa3. Do the fundamentals 
that supposedly drive sovereign credit ratings rationalise this historical anomaly? In this 
chapter, the Survey asks this important question and answers a resounding No!
Within its sovereign credit ratings cohort – countries rated between A+/A1 and BBB-/
Baa3 for S&P/ Moody’ s – India is a clear outlier on several parameters, i.e. a sovereign 
whose rating is significantly lower than mandated by the effect on the sovereign rating 
of the parameter. These include GDP growth rate, inflation, general government debt (as 
per cent of GDP), cyclically adjusted primary balance (as per cent of potential GDP), 
current account balance (as per cent of GDP), political stability, rule of law, control of 
corruption, investor protection, ease of doing business, short-term external debt (as per 
cent of reserves), reserve adequacy ratio and sovereign default history. The outlier status 
remains true not only now but also during the last two decades.
Credit ratings map the probability of default and therefore reflect the willingness and 
ability of borrower to meet its obligations. India’ s willingness to pay is unquestionably 
demonstrated through its zero sovereign default history. India’ s ability to pay can be 
gauged not only by the extremely low foreign currency denominated debt of the sovereign 
but also by the comfortable size of its foreign exchange reserves that can pay for the 
short term debt of the private sector as well as the entire stock of India's external debt 
including that of the private sector. India’ s non-government short term-debt as per cent of 
forex reserves stood at 19 per cent as of September 2020. India’ s forex reserves can cover 
an additional 2.8 standard deviation negative event, i.e. an event that can be expected 
to manifest with a probability of less than 0.1 per cent after meeting all short-term debt. 
India’ s forex reserves stood at US$ 584.24 as of January 15, 2021, greater than India’ s 
Does India’s Sovereign Credit Rating 
reflect its fundamentals No!
85 Does India’s Sovereign Credit Rating reflect its fundamentals No!
THE BIAS AGAINST EMERGING GIANTS IN SOVEREIGN CREDIT 
RATINGS
3.1.	 Never 	 in 	 history 	 has 	 the 	 fifth 	 lar gest 	 economy 	 in 	 the 	 world 	 been 	 rated 	 a 	 BBB-! 	 Since 	 1994,	
the 	 only 	 times 	 that 	 the 	 sovereign 	 credit 	 ratings 	 of 	 the 	 fifth 	 lar gest 	economy 	 in 	 current 	 US$ 	 terms	
has 	 precipitously 	 declined, 	 has 	 been 	 when 	 emer ging 	 giants 	 China 	 and 	 India 	 have 	 come 	 to 	 occupy	
the 	position. 	Figure 	1 	shows 	that 	the 	sovereign 	credit 	rating 	of 	the 	fifth 	lar gest 	economy 	(current	
US$) 	 by 	 two 	 credit 	 ratings 	 agencies 	 (CRAs) 	 declined 	 steeply 	 in 	 2005 	 following 	 China’ s 	 entry 	 into	
the 	 top 	 five 	 economies. 	 Similarly , 	 the 	 sovereign 	 credit 	 rating 	 of 	 the 	 fifth 	 lar gest 	 economy 	 (current	
US$) 	 by 	 two 	 CRAs 	 declined 	 steeply 	 in 	 2019 	 following 	 India’ s 	 entry 	 into 	 the 	 top 	 five 	 economies. 	
Figure 1: Sovereign Credit Rating of Fifth Largest Economy (Current US $)
Sovereign Credit Rating
S&P/Moody's
Source: 	Bloomber g	and 	 W orld	Bank
total external debt (including that of the private sector) of US$ 556.2 bn as of September 
2020. In corporate finance parlance, therefore, India resembles a firm that has negative 
debt, whose probability of default is zero by definition. Despite this compelling statistic, 
India is an inexplicable outlier in its ratings cohort. The Survey’ s findings are consistent 
with a large academic literature that highlights bias and subjectivity in sovereign credit 
ratings, especially against countries with lower ratings.
As ratings do not capture India’ s fundamentals, it comes as no surprise that past episodes 
of sovereign credit rating changes for India have not had major adverse impact on select 
indicators such as Sensex return, foreign exchange rate and yield on government securities. 
Past episodes of rating changes have no or weak correlation with macroeconomic indicators. 
India’ s fiscal policy, therefore, must not remain beholden to a noisy/biased measure of 
India’ s fundamentals and should instead reflect Gurudev Rabindranath Thakur’ s sentiment 
of a mind without fear. Despite ratings not reflecting fundamentals, noisy, opaque and 
biased credit ratings damage FPI flows. It is therefore imperative that countries engage 
with CRAs to make the case that their methodology must be corrected to reflect economies’ 
ability and willingness to pay their external obligations. Moreover, the pro-cyclical 
nature of credit ratings and its potential adverse impact on economies, especially low-
rated developing economies must be expeditiously addressed. India has already raised 
the issue of pro-cyclicality of credit ratings in G20. In response, the Financial Stability 
Board (FSB) is now focusing on assessing the pro-cyclicality of credit rating downgrades.
86 Economic Survey 2020-21   V olume 1
3.2.	 A 	 simila r 	 trend	 is 	 seen 	 in 	 PPP 	 current 	 internati onal 	 $	 terms. 	 Since 	 1994,	 the 	 only 	 times 	
that 	 the	 sovereign 	 credit 	 ratings 	 of 	 the 	 third 	 lar gest 	 economy 	 in 	 PPP 	 terms 	 has 	 steeply 	 declined, 	
has	 been 	 when 	 emer ging 	 giants 	 China 	 and 	 India	 have 	 become	 the 	 third 	 lar gest 	 economy . 
Figure 	 2 	 shows	 that	 the 	 sovereign 	 credit 	 rating 	 of 	 the 	 third 	 lar gest 	 economy 	 (PPP) 	 declined 	
sharply 	 in 	 1994	 by	 two	 CRAs,	 following 	 China’ s	 entry	 into 	 the 	 top 	 three 	 economies. 	 Similarly , 	
the	 sovereign 	 credit 	 rating 	 of 	 the 	 third 	 lar gest 	 econom y 	 (PPP) 	 declined 	 sharply 	 in 	 2009	 by	 two	
CRAs,	following 	India’ s 	entry	into 	the 	top 	three 	economies. 	
Figure 2: Sovereign Credit Rating of Third Largest 
Economy (PPP Current International $)
Sovereign Credit Rating
S&P/Moody's
Source: 	Bloomber g	and 	 W orld	Bank
INDIA’S SOVEREIGN CREDIT RATINGS 
3.3 This 	 anomaly 	 in 	 sovereign 	 credit 	 ratings 	 has 	 continued 	 for 	 India. Currently , India 	 is 	 rated	
investment 	 grade 	 by 	 three 	 major 	 CRAs 	 – 	 S&P , 	 Moody’ s 	 and 	 Fitch. 	 India’ s 	 sovereign 	 credit	
ratings 	 during 	 1998-2020 	 are 	 presented 	 in 	 T able 	 1. 	 Rationale 	 given 	 for 	 the 	 same 	 by 	 these	
CRAs 	 is 	 depicted 	 in 	 Figure 	 3. 	 India’ s 	 sovereign 	 credit 	 rating 	 downgrades 	 during 	 1998-2018	
are 	 mainly 	 confined 	 to 	 the 	 1990s 	 on 	 account 	 of 	 the 	 post-Pokhran 	 sanctions 	 in 	 1998. 	 India’ s	
sovereign 	 credit 	 ratings 	 upgrades 	 have 	 mainly 	 been 	 witnessed 	 in 	 the 	 second 	 half 	 of 	 2000s, 	 in	
recognition 	 of 	 higher 	 economic 	 growth 	 prospects 	 and 	 strengthened 	 fundamentals 	 of 	 the 	 Indian	
economy .
3.4	 Further , 	 during 	 most 	 of 	 the 	 1990s 	 and 	 mid 	 2000s, 	 India’ s 	 sovereign 	 credit 	 rating 	 was	
speculative 	 grade. 	 India’ s 	 credit 	 rating 	 was	 upgraded 	 to 	 investment 	 grade 	 by	 Moody’ s 	 in 	 2004, 	
Fitch 	 in	 2006	 and 	 S&P 	 in 	 2007	 (T able	 1). 	 Notably , 	 Indian	 economy 	 grew 	 at 	 an 	 average 	 rate 	
of	 over	 six 	 per 	 cent 	 (Figure 	 4), 	 and 	 at 	 approximatel y 	 eight	 per 	 cent 	 in 	 several 	 years	 during 	
this	 period. 	 Hence, 	 during 	 most	 of 	 the 	 decade 	 of 	 1990	 and 	 early 	 2000’ s, 	 India’ s 	 high 	 rate 	 of 	
economic 	growth 	co-existed 	with 	 a 	sovereign 	credit 	rating 	of 	“speculative 	grade”.
87 Does India’s Sovereign Credit Rating reflect its fundamentals No!
Table 1: India’s Sovereign Credit Rating (1998-2020)
Date S&P Moody’s Fitch
June 	1998 Ba2*
October 	 1998 BB*
March 	2000 BB+*
November 	2001 BB*
February 	2003 Ba1*
January 	 2004 BB+*
January 	 2004 Baa3
February 	2005 BB+* 	
August	2006 BBB-
January 	 2007 BBB- 	
November 	2017 Baa2
June 	2020 Baa3
*Speculative 	 Grade; 	 Green 	 highlights 	 ratings 	 upgrade ; 	 Red 	 highlights 	 ratings 	 downgrade , 	 Black 	 indicates 	 first 	 rating
Source: 	Compiled 	from	S&P 	Global,	Fitch 	and 	Moody’ s
Box 1: What are Sovereign Credit Ratings?
Sovereign 	 credit 	 ratings 	 seek 	 to 	 quantify 	 issuers’ 	 ability 	 to 	 meet 	 debt 	 obligations. 	 When 	 favourable, 	
these	 can 	 facilitate 	 countries 	 access 	 to 	 global	 capital 	 markets 	 and 	 foreign 	 investment. 	 T able 	 below 	
presents 	what 	three 	key 	CRAs 	–	S&P , 	Moody’ s 	and 	Fitch, 	seek 	to 	measure.
What Credit Ratings Measure
Fitch "Credit 	 ratings 	 express 	 risk	 in 	 relative 	 rank 	 order ,	 which 	 is 	 to 	 say 	 they 	 are 	 ordinal 	
measures 	 of 	 credit 	 risk	 and 	 are 	 not 	 predictive 	 of 	 a 	 specific 	 frequency 	 of 	 default 	 or 	 loss. 	
Fitch 	 Ratings' 	 credit 	 ratings 	 do	 not 	 directly 	 address 	 any 	 risk	 other 	 than 	 credit 	 risk,	 ratings 	
do 	 not 	 deal 	 with 	 the 	 risk	 of 	 a 	 market 	 value 	 loss 	 on	 a 	 rate d 	 security 	 due 	 to 	 changes 	 in 	
interest 	rates, 	liquidity	and 	other 	market 	considerations."
Moody's "There 	 is 	 an 	 expectation 	 that	 rating 	 will, 	 on	 average, 	 relate 	 to 	 subsequent 	 default 	 frequency , 	
although	 they 	 typically	 are 	 not 	 defined 	 as 	 precise 	 default 	 rate 	 estimates. 	 Moody's 	 ratings 	
are 	 therefore 	 intended 	 to 	 convey 	 opinions 	 of 	 the 	 relative 	 creditworthiness	 of 	 issues 	 and 	
obligations...Moody's 	 rating 	 process 	 also 	 involves 	 forming 	 views 	 about 	 the 	 likelihood 	 of 	
plausible 	 scenarios, 	 or 	 outcomes—not 	 forecasting 	 them,	 but 	 instead 	 placing 	 some 	 weight 	
on 	 their 	 likely 	 occurrence 	 and 	 on	 the 	 potential	 credit 	 consequences. 	 Normal 	 fluctuations 	
in 	 economic 	 activity	 are 	 generally 	 included 	 in 	 these 	 scenarios, 	 and 	 by	 incorporating 	 our 	
views 	 about 	 the 	 likehood	 of 	 such 	 scenarios, 	 we 	 give 	 our 	 ratings 	 relative 	 stability 	 over 	
economic 	cycles 	and 	a 	sense 	of 	horizon."
Standard 	
&	Poor's
"Standard 	 & 	 Poor's 	 credit 	 ratings 	 are 	 designed 	 primarily 	 to 	 provide 	 relative 	 rankings 	
among 	 issues 	 and 	 obligations 	 of 	 overall 	 creditworthiness; 	 the 	 ratings 	 are 	 not 	 measures 	 of 	
absolute 	 default 	 probability . 	 Creditworthiness 	 encompasses 	 likehood	 of 	 default 	 and 	 also 	
includes 	payment 	priority , 	recovery , 	and 	credit 	stability ."
Source: 	 IMF	(2010)
88 Economic Survey 2020-21   V olume 1
Sovereign 	 credit 	 ratings 	 broadly 	 rate 	 countries 	 as 	 either 	 investment 	 grade 	 or 	 speculative 	 grade, 	 with 	
the	 latter 	 projected 	 to 	 have 	 a 	 higher 	 likelihood 	 of 	 default 	 on	 borrowings. 	 The 	 threshold 	 of 	 Investment 	
grade	 is	 considered 	 to 	 be 	 BBB- 	 for 	 S&P 	 and 	 Fitch 	 and 	 Baa3 	 for 	 Moody’ s. 	 T able 	 below 	 presents 	 the 	
rating	scale 	comparison 	between 	S&P , 	Moody’ s 	and 	Fitch.
Credit Rating Scale Comparison between some major CRAs
Interpretation Fitch and S&P Moody's
Highest 	quality AAA Aaa
High 	quality AA+ Aa1
AA Aa2
AA– Aa3
Strong 	payment 	capacity A+ A1
A A2
A– A3
Adequate 	payment 	capacity BBB+ Baa1
BBB Baa2
BBB– Baa3
Likely 	to 	fulfill 	obligations, 	on BB+ Ba1
going 	uncertainty BB Ba2
BB– Ba3
High-risk 	obligations B+ B1
B B2
B– B3
V ulnerable 	to 	default CCC+ Caa1
CCC Caa2
CCC– Caa3
Near 	or 	in 	bankruptcy 	or 	default CC Ca
C C
D D
Source:	IMF	(2010)
Examples 	 of 	 credit 	 ratings 	 methodologies 	 employed 	 by	 some 	 CRAs 	 may 	 be 	 seen 	 in 	 the 	 Appendix, 	
which	presents 	the 	credit 	ratings 	methodology 	of 	Moodys’ 	and 	Fitch.